Doing business in China: from this week's AsiaWeek.
What China Gloom?
Profits for investors with good basics -- and patience
DENIS SIMON, the author of this item, is General Manager, Andersen Consulting, China, and has been assisting
major foreign investors there since 1983.
A NUMBER OF RECENT articles on the decline in investment flows into China have argued that this
represents a fundamental rethinking by many foreign companies about business opportunities there. The analysis seems
to portend a period of gloom and even doom in which some companies continue to scurry around to secure elusive
deals. While these observations may be factually correct, they represent a limited understanding of the dynamics of the
China market and appreciation of what is happening on the ground.
The 1990s for the most part has been a time of "China fever" among investors. Tiananmen in 1989 was a catalyst.
Foreign firms felt that the worst had happened and now they could move beyond many of the political risks associated
with business expansion. The decade has seen increasing normalization of the business environment, with more
predictability in the implementation of the joint-venture law. Not all problems abated: those in intellectual property rights
as well as petty corruption are ever present.
The concerns now about China's business climate are due in large part to the settling down of the investment situation,
including a moderation of the "fever" and a retreat from the almost "Wild West" business mentality that prevailed after
Tiananmen. Investment inflows have ebbed, but we must not accept superficial explanations as to why, especially given
the problems plaguing many other Asian economies. Also, the decision by several multinationals to either pull out of
China (Ameritech), or reduce their presence or operations (Chrysler), must not be viewed just from the Chinese side,
but also from the perspective of many firms' inability to create and apply sound business strategies.
Andersen Consulting has worked with many of the world's leading corporations in China and we have learned not to
underestimate the challenge of operating in its fast-changing economy. Implementation of the economic reform program
has been uneven and largely heterogeneous. Parochialism and politics have led each province to interpret Beijing's
directives differently. With decentralization and increased local autonomy, foreign companies often find that policies
strictly upheld in one region are largely ignored in another. This is not new: China's emperors have long tried to
overcome the problem.
Even taking into account the "external" complexities of operating in China, the main source of foreign business
frustration and failure has been in "internal" management. Many companies simply forget good business basics when
they enter China. They concentrate their resources on the exotic side, spending more time on the banquet circuit and
cultivating good guanxi with members of the State Council than on how to build a viable business. Successful
companies seem to have made these transformations:
Transition from an "opportunistic" mode to a "strategic" posture: instead of measuring success by the number of joint
ventures or deals accumulated, they determine where they want to be over the next five years and plan strategically.
Shift from a "fragmented" presence to a holistic vision: rather than pursue opportunities division by division in a
decentralized manner, they learn to articulate a coherent corporate theme for their presence in China.
Move away from simple guanxi ties to create "partnership networks" across key sectors and regions: they learn how to
translate contacts into networks of relationships that provide project sponsorship or even protection against unexpected
changes in policies.
Adopt a proactive stance on shaping economic reforms instead of just reacting to them.
Transition from a foreign producer to a "localized" player: losing their "foreign" image and plugging into the economic
landscape allows companies to orchestrate effective supply chains (for increasing local content and expanding market
share) and develop a cadre of local managers.
Shift from simply hiring workers in China to developing human resource assets: foreign firms cannot depend on
expatriate management over the long term. Recruitment, training and retention schemes must be put in place early.
Integration of China business with the company's regional and global activities: loss of market share in China can have a
demonstrable impact on international profitability.
Achieving these "transformations" requires patient nurturing of relationships at all levels. In China, many business
relationships tend to be self-obsolescing: the moment the ink is dry on the agreement, there is a high probability that the
Chinese partner, bombarded with other opportunities, will lose interest. The foreign firm must constantly revitalize the
elements that made the venture attractive to both sides. As the Chinese often say, but few foreign executives remember:
"The 30- or 50-year agreement we have just signed simply defines the beginning of our relationship from where we are
right now."
The press has been far too quick to attribute the problems of foreign corporations to the shortcomings of the Chinese
business setting. Let's stop placing all the blame on China, and face the fact that good business practices can -- and do
-- lead to success there. |
